Financial Markets in Discrete Time

Abstract

In this chapter, after introducing the basic concepts of financial markets, we first use the binomial tree model to illustrate the risk-neutral valuation principle. Then we study the general discrete-time model and give the martingale characterization of arbitrage-free market and European contingent claims pricing. In addition, we discuss the investment strategy via expected utility maximization and utility function-based contingent claims pricing and market equilibrium pricing. In the end, we study the pricing of American contingent claims.